Russian billionaire Oleg Deripaska has been forced to hand over his stake in Magna International Inc. to his banks, after taking a margin call on his $1.54-billion (U.S.) investment in the Canadian auto parts maker.
In a stunning turn of events, Paris-based bank BNP Paribas SA seized the Russian oligarch's 20 million shares in Magna, unwinding a deal that closed 13 months ago and making one of the world's richest men the latest casualty of the global credit crisis.
The move hands full control of the auto parts giant back to its founder, Frank Stronach.
According to people familiar with the transaction, BNP Paribas led a syndicate that financed an estimated $1-billion.
That amounts to about two-thirds of the total purchase price.
It is understood that the lending agreement gave the banks the power to reclaim the Magna shares in the event they fell more than 40 per cent below the $76.83 a share Mr. Deripaska paid for the stock. That threshold appears to have been triggered on Thursday, when the shares slumped to a closing price of $45.59 on the New York Stock Exchange.
The aggressive move to force one of Russia's richest men to hand over assets casts a stark spotlight on the harsh new lending environment for businesses seeking to raise capital or hang on to acquisitions that were snapped up in headier times.
It also highlights how quickly billionaires, even in growing economies such as Russia, are seeing their fortunes erode as the crisis cripples financial markets around the globe.
Sources said banks lined up to lend money to Mr. Deripaska in the spring of 2007, when he first announced he had struck the agreement with Mr. Stronach. Eighteen months later, a deal that was code-named Project Pearl is in tatters because of a crisis that could spiral into an "economic Pearl Harbour," according to a warning issued this week by Omaha billionaire Warren Buffett.
"It is a whole new world. When a deal falls apart 18 months after the fact, anything is possible. Nothing can be taken for granted," said one person close to Magna.
Like many financial upsets in the past few weeks, the unravelling of the Magna investment happened with breath-taking speed.
Sources said Magna executives were stunned late Thursday when they were informed that Mr. Deripaska was ceding his stake to banks.
At Thursday's closing price of $45.59 in New York, his 20 million Magna shares were worth $911.8-million, suggesting that the loss on the sale will cost him almost $630-million.
"He had to make a decision based on market conditions," said one high-ranking European auto source familiar with Magna and Mr. Deripaska's investment. "He had to choose his priorities."
The news sent Magna's stock plunging initially in Toronto and New York, although it rallied in trading later in the day to close at $43.45, down $2.14 on the NYSE.
Investment sources and analysts said Morgan Stanley Inc. began selling off the shares yesterday to large investors.
Several sources said Magna is in a blackout period and could not use its $2.5-billion (U.S.) in cash to buy back the shares.
But the surrender contributed to a wild day on the RTS exchange in Russia, which halted all trading three times yesterday and finally shut early amid growing worries that some Russian companies will default on their debts.
Magna shares have been falling steadily for weeks in the midst of massive production cuts at the Detroit Three auto makers - three of its five largest customers - and growing worries about the European auto market, which generated more revenue than North America for Magna during the second quarter.
Magna insisted yesterday, however, that it believes the Russian market is still healthy and vowed to keep working with Mr. Deripaska and the country's second-largest auto maker, Gaz Group, which he controls.
"We believe that the Russian market still holds significant opportunities for us and intend to continue to pursue joint opportunities with Russian Machines and Gaz, as well as other opportunities to advance our position in Russia," Magna's co-chief executive officer, Siegfried Wolf, said in a statement.
Nonetheless, when Magna was urging shareholders to support the deal more than a year ago, it said the financial investment by Mr. Deripaska and Russian Machines in the Canadian auto parts giant was crucial to its plans to grow in Russia.
"In targeting the Russian market, Magna believes that the best way to minimize risk and maximize returns is by working with an established industrial partner with an aligned economic interest," the company said in the management circular for the deal. "Magna believes that having Russian Machines, its controlling shareholder, Basic Element, and its ultimate controller, Mr. Oleg Deripaska, as a strategic alliance partner for Russia will assist Magna in carrying out its expansion strategy in Russia and other emerging markets."
Russia is one of the fastest-growing vehicle markets and one of the so-called BRIC nations (Brazil, Russia, India, China) targeted for growth by virtually all the world's auto makers.
The market will remain strong, one European industry source said, pointing out that if North Americans decide to wait six months to buy a new car, they can drive their old one.
"In Russia, most of the people can't make the decision to wait, because they have no car," he said.
Magna (MG.A-T)
Close: $46.32 (Cdn.), down $2.92
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